Kraft to buy Cadbury in friendly $19.5 billion deal

Agreement puts an end to months of squabbling between food giants

By

SimonKennedy

LONDON (MarketWatch) -- After months of wrangling, Kraft Foods on Tuesday lifted its offer for Cadbury to around 11.9 billion pounds ($19.5 billion) in a bid that won approval from its British target and that will create the world's biggest chocolate producer.

The offer for Cadbury (CBRY)
CBY, +37.16%
is worth 840 pence a share, with holders also due to receive a dividend worth an extra 10 pence a share.

The agreement follows a four-month war of words between Cadbury Chairman Roger Carr and Kraft
KFT
CEO Irene Rosenfeld. Carr had repeatedly called Kraft's previous offer "derisory" and told shareholders that the prior bid -- worth around 769 pence a share at Friday's closing price -- was an attempt to "steal the company."

The acquisition of the 186-year-old Cadbury will make Kraft the world's biggest chocolate and confectionery producer by revenue, through the addition of brands including Dairy Milk, Creme Egg and Green & Black's.

Kraft will also become the No. 2 gum producer behind privately-held Mars Inc. and consolidate the company's position as the world's second biggest food group with combined revenue of nearly $60 billion in 2008.

Kraft had been up against a deadline of late Tuesday to submit a new offer -- a move analysts had predicted would be necessary to win over Cadbury shareholders.

Under the new terms, shareholders will receive 500 pence in cash and 0.1874 Kraft shares for every Cadbury share. That represents close to a 50% premium over the price in early September, before Kraft put the U.K. group in play.

Holders of Cadbury's American Depository Shares will get 2,000 pence a share in cash and 0.7496 Kraft shares for every ADS.

Shares in Cadbury rose 3.6% to 836.50 pence on the London Stock Exchange Tuesday.

Kraft shares fell 0.5% on Wall Street, while Hershey
HSY, +1.71%
which is seen as increasingly unlikely to launch a counter-bid, rose 3%.

Standard & Poor's equity analyst Carl Short downgraded Cadbury to hold from buy after the announcement, saying the offer level had been finely judged to achieve enough backing from shareholders.

It will also likely deter any rival bidders, who would likely have to offer around 900 pence a share to have any chance of success, Short said.

Cost savings

Kraft said it expects to generate annual cost savings of around $675 million after around three years. Implementation costs will total around $1.3 billion, it added.

The deal is expected to boost earnings per share by around 5 cents in 2011.

Chief Financial Officer Timothy McLevish told analysts on a conference call that the deal would dilute earnings in 2010, though he didn't give a figure for the likely impact.

McLevish added that, while the deal will increase Kraft's debt levels, strong cash flows should help the group reduce those levels over the next 18 to 24 months and added that should allow the group to retain its investment grade credit rating.

Cadbury's Carr said the offer "represents good value for Cadbury shareholders." As recently as five days ago Carr had attacked Kraft as a "low-growth conglomerate" with a "long history of underperformance." See MarketWatch First Take on the Kraft tie-up.

Rosenfeld told analysts that it was too early to comment on any potential role for Carr or Cadbury CEO Todd Stitzer at the expanded group.

A person familiar with the negotiations said the companies only started to come together over the weekend, with direct talks between Rosenfeld and Carr taking place on Monday just ahead of the bid deadline.

Carr's demands during the negotiations all revolved around getting the best value in the deal, and there were no promises made by Kraft over jobs for top executives, the person familiar with the talks said.

Rosenfeld said the company will "continue to retain a strong presence in the U.K.," following concern from government ministers and unions that a deal could result in widespread job cuts.

U.K. Prime Minister Gordon Brown told a press conference that the government is determined that the level of investment that takes place in Cadbury in the U.K. should be unchanged by the deal.

The Unite union said it was a "very sad day for U.K. manufacturing" and that it remained worries about the future of 7,000 workers in the U.K. and Ireland.

More cash

The new offer has a significantly higher cash component, which could both help persuade Cadbury shareholders over the merits of the deal and appease some Kraft shareholders.

Kraft's biggest investor, Warren Buffett's Berkshire Hathaway
BRK.A, -0.29%BRK.B, -0.77%
had expressed concern over the number of new shares Kraft would have to issue to finance the deal.

While the deal may now be more appealing to Kraft investors, the U.S. group said the change to the terms means it no longer needs to get approval from its own investors anyway. That's because it will no longer be issuing more than 20% of the total shares currently outstanding.

Some long-term Cadbury shareholders, including Standard Life (SL), had been calling for an even higher offer. The investment firm's Head of U.K. Equities David Cumming said Tuesday that Standard Life "is supportive of the management's decision, although the achieved price is slightly light of our stated target."

Many Cadbury shareholders are hedge funds who bought the stock after Kraft put the chocolate maker in play, and who are looking for a relatively modest return.

Kraft's Rosenberg said there had been fairly consistent feedback from both sets of shareholders that they wanted to see more cash and less stock in the deal.

Hershey had been considering launching its own bid for Cadbury, but The Wall Street Journal reported Monday that the candy group would likely walk away if Cadbury and Kraft reached a friendly deal.

Jefferies International analyst Simon Marshall-Lockyer said the chances of a counter-bid now appear remote and added that he expects the majority of shareholders to accept the offer.

The U.K.'s takeover authority said Tuesday that if Hershey or Italy's Ferrero want to make an offer they must do so before the U.K. market opens on Jan. 25.

Lazard & Co are the lead advisers to Kraft, which is also being advised by Centerview Partners, Citigroup and Deutsche Bank.

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